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Exam 17: Financing Land Development Projects

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Question 1

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Generally, which of the following is FALSE regarding an option contract?

A) An option contract allows the developer to perform a preliminary market study and feasibility analysis
B) If the developer decides to purchase a property, the price of an option is applied towards the price of the property
C) If the developer decides not to purchase the property, the landowner will refund any money paid for the option
D) An option contract provides the developer with the assurance that a property will not be sold over the course of the option period

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Question 2

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An analysis of whether land can be purchased and developed profitably is known as:

A) Financial analysis
B) Feasibility study
C) Turnkey study
D) Project profitability

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Question 3

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Generally, which of the following is FALSE regarding interest rate risk management techniques?

A futures instrument, such as a T-bill, can be used to hedge a cash or a spot instrument such as the prime rate, where the two instruments are not perfectly correlated. What type of hedge is this referred to as?

$\begin{array} { lr } \text{Tatal sales revenue}&\text { \$ 10,000,000 } \\ \text{Less: Develapment cost}&\text { 6,000,000 } \\ \text{Less: Land asking price}& \underline{1,000,000} \\\text{Patential gross profit}&\$ 3,000,000 \\ \text{Less: Admin., legal, commissians, etc.}&\underline{1,500,000} \\ \text{Patential net profit}&\underline{\$ 1,500,000} \\ \end{array}$ -Consider the feasibility study shown in the table above. What is the return on total cost for the proposed project?

Which of the following was NOT stated as contributing to the complication of estimating amount of interest carry?

A transaction in which two firms trade individual financing advantages to produce more favorable borrowing terms for each is know as an) :

Option contracts are used to reserve a parcel of land so that it will not be sold to someone else, while the developer does preliminary analysis of the site.

$\begin{array} { c r c } \text { Month } & \begin{array} { r } \text { Canstructian } \\\text { Draw }\end{array} & \begin{array} { c } \text { Sales } \\\text { Revenue }\end{array} \\1 & \$ 200,000 & \\2 & 150,000 & \\3 & 75,000 & \\4 & 25,000 & \$ 600,000 \\\text { } & & \\\text { Total } & \$ 450,000 & \$ 600,000 \\\text { Present value @ 12\% } & \$ 441,883 & \$ 576,588 \\\end{array}$ -Consider the table above, which summarizes monthly construction draws and sales revenues. What is the percent of lot sales revenue that needs to be used to repay the loan?

A feasibility study analyzes whether a tract can be purchased and developed profitably.

A developer must sell all of the lots in a development project and repay the entire development loan before any of the new property owners can receive a clear title.

It is common for a developer to hold back funds to be sure that subcontractors perform all work completely before making final payment.

By using an option contract, a developer may profit from an appreciation in the property's value over the option period.

It is proper to include an estimate for developer profit as a cost of development when projecting net cash flows and evaluating whether a required rate of return will be met.

Each parcel of land in a new development is selling for $15,000 and the total project revenue is estimated to be $5,000,000. The project lender has stated that the loan should be paid off when 80% of the total project revenue has been earned. The total loan amount is $3,500,000. What is the release price for each parcel?

Lenders typically insist on a loan repayment rate that equal to the rate for which parcels are expected to sell.

The land development industry is best characterized by which of the following statements?

When financing land development, the lender generally requires the developer to submit which of the following?

It is illegal for the lender to hold back funds from the developer.

Which of the following is the MOST LIKELY sequence of events in the land development process?